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Dividend Stocks

Link benefits from high customer switching costs and relatively low marginal costs, which underpin its narrow economic moat rating

Young woman trading stock market by touching.

Business Strategy & Outlook:   

Link Administration has created a narrow economic moat in the Australian and U.K. financial services administration sectors via its leading positions in fund administration and share registry services. Client retention rates exceed 90% in both markets, underpinned by inflation-linked contracts of between two and five years. The capital-light nature of the business model should enable good cash conversion, regular dividends, and relatively low gearing. Earnings growth prospects are supported by organic growth in member numbers, industry fund consolidation, and continued outsourcing trends. The company was formed via numerous acquisitions made since 2005 under the ownership of private equity firm Pacific Equity Partners, which sold its remaining holding in the company in 2016. It is considered the Australian fund administration business, which constitutes around a third of group revenue, to be the strongest of Link’s businesses. Link usually comprises around three fourths of fund administration customer costs, which creates material operational and reputational risks to switching providers. Contract lengths of between three and five years, along with six to nine months of lead time to change provider, also create barriers to switching. Switching costs are evidenced by Link’s recurring revenue rate of around 90% and client retention rate of over 95%. Six of Link’s 10 largest clients have been with the company for over 20 years.

The corporate markets revenue grows at 3% per year, reflecting inflation, and assume no market share gains due to the strength of major competitor Computershare. The EBIT margins grow from 12% in fiscal 2021 to 21% by fiscal 2031 partly due to cost-cutting. Over the next decade, it is expected that an EPS CAGR, excluding amortization of acquired intangible assets, of 9%. The capital-light nature of the business model means cash conversion is expected to be strong, enabling dividends to be maintained and net debt gradually reduced, assuming no further acquisitions. Our discounted cash flow valuation assumes a weighted average cost of capital of 7.7%.

Financial Strengths:  

Link’s balance sheet is in good shape with a net debt/EBITDA ratio of around 2.6 as at Dec. 31, 2021, which is within the company’s target range of 2 to 3. From an interest coverage ratio perspective, Link has a manageable interest coverage ratio of around 14.

Bulls Say: 

  • It is expected Link’s EPS to grow at a CAGR of 9% over the next decade, driven by a revenue CAGR of 6% per year, in addition to cost-cutting and operating leverage.
  • Our base case assumes Link’s Australian fund administration market share grows by 2.5 percentage points to 32.5% over the next five years. 
  • The capital-light nature of the business model should enable regular dividends, and low financial leverage creates the opportunity for debt-funded acquisitions.

Company Description:  

Link provides administration services to the financial services sector in Australia and the U.K., predominantly in the share registry and investment fund sectors. The company is the largest provider of superannuation administration services and the second-largest provider of share registry services in Australia. Link acquired U.K.-based Capita Asset Services in 2017; this provides a range of administration services to financial services firms and comprises around 40% of group revenue. Link’s clients are usually contracted for between two and five years but are relatively sticky, which results in a high proportion of recurring revenue. The business model’s capital-light nature means cash conversion is relatively strong.

(Source: Morningstar)

DISCLAIMER for General Advice: (This document is for general advice only).

This document is provided by Laverne Securities Pty Ltd T/as Laverne Investing. Laverne Securities Pty Ltd, CAR 001269781 of Laverne Capital Pty Ltd AFSL No. 482937.

The material in this document may contain general advice or recommendations which, while believed to be accurate at the time of publication, are not appropriate for all persons or accounts. This document does not purport to contain all the information that a prospective investor may require.  The material contained in this document does not take into consideration an investor’s objectives, financial situation or needs. Before acting on the advice, investors should consider the appropriateness of the advice, having regard to the investor’s objectives, financial situation, and needs. The material contained in this document is for sales purposes. The material contained in this document is for information purposes only and is not an offer, solicitation or recommendation with respect to the subscription for, purchase or sale of securities or financial products and neither or anything in it shall form the basis of any contract or commitment. This document should not be regarded by recipients as a substitute for the exercise of their own judgment and recipients should seek independent advice.

The material in this document has been obtained from sources believed to be true but neither Laverne and Banyan Tree nor its associates make any recommendation or warranty concerning the accuracy or reliability or completeness of the information or the performance of the companies referred to in this document. Past performance is not indicative of future performance. Any opinions and or recommendations expressed in this material are subject to change without notice and, Laverne and Banyan Tree are not under any obligation to update or keep current the information contained herein. References made to third parties are based on information believed to be reliable but are not guaranteed as being accurate.

Laverne and Banyan Tree and its respective officers may have an interest in the securities or derivatives of any entities referred to in this material. Laverne and Banyan Tree do and seek to do business with companies that are the subject of its research reports. The analyst(s) hereby certify that all the views expressed in this report accurately reflect their personal views about the subject investment theme and/or company securities.

Although every attempt has been made to verify the accuracy of the information contained in the document, liability for any errors or omissions (except any statutory liability which cannot be excluded) is specifically excluded by Laverne and Banyan Tree, its associates, officers, directors, employees, and agents.  Except for any liability which cannot be excluded, Laverne and Banyan Tree, its directors, employees and agents accept no liability or responsibility for any loss or damage of any kind, direct or indirect, arising out of the use of all or any part of this material.  Recipients of this document agree in advance that Laverne and Banyan Tree are not liable to recipients in any matters whatsoever otherwise; recipients should disregard, destroy or delete this document. All information is correct at the time of publication. Laverne and Banyan Tree do not guarantee reliability and accuracy of the material contained in this document and are not liable for any unintentional errors in the document.

The securities of any company(ies) mentioned in this document may not be eligible for sale in all jurisdictions or to all categories of investors. This document is provided to the recipient only and is not to be distributed to third parties without the prior consent of Laverne and Banyan Tree.

Categories
Commodities Trading Ideas & Charts

Initiating Coverage of Plug Power With No-Moat Rating

Business Strategy & Outlook

Plug Power seeks to be a leader in the green hydrogen economy. The company’s strategy is centered on its vertical integration approach to provide customers a complete hydrogen solution— from fuel cell technology to green hydrogen fuel. Green hydrogen as a fuel to decarbonize is in its infancy. Customers face numerous challenges with adopting hydrogen technology, including economics and lack of green hydrogen production and infrastructure. Within this context, Plug’s efforts to provide customers a one-stop-shop solution of technology and fuel is considered as an endeavor to lower the barriers for customer adoption. While this strategy brings greater capital intensity, it positions Plug as the only all-in-one provider within the industry. The ambition of Plug’s strategy stands out relative to peers who focus on simply providing fuel cell or electrolyzer solutions. 

Plug’s primary end market historically has been material handling (forklifts). The company recognized material handling offered the nearest route to market to prove hydrogen’s value case and established relationships with large companies such as Amazon and Walmart. While material handling comprises the bulk of sales today, the company’s long-term end market focus also includes on-road transport, stationary power, electrolyzers, and green hydrogen fuel. Plug has pursued a partnership approach to target many of its end markets and has several joint ventures with leading companies. These include Renault (light commercial vehicles), Acciona (green hydrogen production), SK (stationary power/electrolyzers), and Fortescue (electrolyzers). A potential partnership for the heavy-duty truck market is still pending, given this represents a sizable market opportunity. Plug has a global approach to its end markets, but the U.S. and Europe are its largest focus areas, particularly for establishing its green hydrogen network.

Financial Strengths

Plug Power’s financial strength has greatly improved in recent years following large equity capital increases. For much of Plug’s history the company’s cash and investments balance has been around $100 million, but stood at north of $4 billion as of Dec. 31, 2021. Current debt outstanding consists of $200 million of convertible notes maturing June 2025 and approximately $100 million under a term loan maturing October 2025. In addition, the company has approximately $200 million of financing obligations associated with sale leaseback financings. Plug Power’s strategic decision to produce green hydrogen greatly increases its future capital requirements. Based on the company’s long-term target of 1,000 tons per day of green hydrogen capacity, a capital requirement of over $4 billion is estimated based on the company’s approximate capital expenditure per ton guidance. While this represents a large use of capital, Plug is expected to raise debt against this business area given its nature. Plug’s operating cash flow is expected to inflect into positive territory around 2025, driven by continued revenue growth and an improvement in fuel margins as it in-sources hydrogen production.

Bulls Say

  • Plug’s partnerships with leading global companies provide validation of its differentiated strategy. 
  • By providing customers a bundled solution of technology and fuel Plug stands to capture a larger addressable market. 
  • Recent capital raises have dramatically improved the company’s financial strength; cash and investments totaled over $4 billion as of year-end 2021.

Company Description

Plug Power is building an end-to-end green hydrogen ecosystem – from production, storage and delivery to energy generation. The company plans to build and operate green hydrogen highways across North America and Europe. Plug will deliver its green hydrogen solutions directly to its customers and through joint venture partners into multiple end markets— including material handling, e-mobility, power generation, and industrial applications.

(Source: Morningstar)

DISCLAIMER for General Advice: (This document is for general advice only).

This document is provided by Laverne Securities Pty Ltd T/as Laverne Investing. Laverne Securities Pty Ltd, CAR 001269781 of Laverne Capital Pty Ltd AFSL No. 482937.

The material in this document may contain general advice or recommendations which, while believed to be accurate at the time of publication, are not appropriate for all persons or accounts. This document does not purport to contain all the information that a prospective investor may require.  The material contained in this document does not take into consideration an investor’s objectives, financial situation or needs. Before acting on the advice, investors should consider the appropriateness of the advice, having regard to the investor’s objectives, financial situation, and needs. The material contained in this document is for sales purposes. The material contained in this document is for information purposes only and is not an offer, solicitation or recommendation with respect to the subscription for, purchase or sale of securities or financial products and neither or anything in it shall form the basis of any contract or commitment. This document should not be regarded by recipients as a substitute for the exercise of their own judgment and recipients should seek independent advice.

The material in this document has been obtained from sources believed to be true but neither Laverne and Banyan Tree nor its associates make any recommendation or warranty concerning the accuracy or reliability or completeness of the information or the performance of the companies referred to in this document. Past performance is not indicative of future performance. Any opinions and or recommendations expressed in this material are subject to change without notice and, Laverne and Banyan Tree are not under any obligation to update or keep current the information contained herein. References made to third parties are based on information believed to be reliable but are not guaranteed as being accurate.

Laverne and Banyan Tree and its respective officers may have an interest in the securities or derivatives of any entities referred to in this material. Laverne and Banyan Tree do and seek to do business with companies that are the subject of its research reports. The analyst(s) hereby certify that all the views expressed in this report accurately reflect their personal views about the subject investment theme and/or company securities.

Although every attempt has been made to verify the accuracy of the information contained in the document, liability for any errors or omissions (except any statutory liability which cannot be excluded) is specifically excluded by Laverne and Banyan Tree, its associates, officers, directors, employees, and agents.  Except for any liability which cannot be excluded, Laverne and Banyan Tree, its directors, employees and agents accept no liability or responsibility for any loss or damage of any kind, direct or indirect, arising out of the use of all or any part of this material.  Recipients of this document agree in advance that Laverne and Banyan Tree are not liable to recipients in any matters whatsoever otherwise; recipients should disregard, destroy or delete this document. All information is correct at the time of publication. Laverne and Banyan Tree do not guarantee reliability and accuracy of the material contained in this document and are not liable for any unintentional errors in the document.

The securities of any company(ies) mentioned in this document may not be eligible for sale in all jurisdictions or to all categories of investors. This document is provided to the recipient only and is not to be distributed to third parties without the prior consent of Laverne and Banyan Tree.

Categories
Technology Stocks

Caterpillar Reiterates its Margin, Free Cash Flow and Services Targets at its 2022 Investor Day

The Japan Finance and market, Data Chart.

Business Strategy & Outlook

The Caterpillar will continue to be the leader in the global heavy machinery market, providing customers an extensive product portfolio consisting of construction, mining, energy, and transportation products. For nearly a century, the company has been a trusted manufacturer of mission-critical heavy machinery, which has led to its position as one of the world’s most valuable brands. Caterpillar’s strong brand is underpinned by its high-quality, extremely reliable, and efficient products. Customers also value Caterpillar’s ability to lower the total cost of ownership. The company’s strategy focuses on employing operational excellence in its production process, expanding customer offerings, and providing value-added services to customers. Since 2014, Caterpillar has taken steps to reduce structural costs and its fixed asset base by implementing cost management initiatives and by either closing or consolidating numerous facilities, reducing its manufacturing floorspace considerably. Over the past decade, the company has continually released new products and upgraded existing product models to drive greater machine efficiency. Customers also rely on the services that Caterpillar provides, for example, machine maintenance and access to its proprietary aftermarket parts. Furthermore, its digital applications help customers interact with dealers, manage their fleet, and track machine performance to determine when maintenance is needed.

Caterpillar has exposure to end markets that have attractive tailwinds. On the construction side, the company will benefit from the $1.2 trillion infrastructure deal in the U.S. The country’s road conditions are in poor condition, which has led to pent-up road construction demand. In energy, the improvement in the price of oil since COVID-19 lows will encourage exploration and production companies to increase oil and gas capital expenditures, leading to increased sales of Caterpillar’s oil-well-servicing products. That said, mining markets will have limited upside, as fixed-asset investment growth in China starts to slow, likely capping commodity price upside.

Financial Strengths

Caterpillar maintains a sound balance sheet. On the industrial side, the net debt/adjusted EBITDA ratio was relatively low at the end of 2021, coming in at 0.2. Total outstanding debt, including both short- and long-term debt was $9.8 billion. Caterpillar’s strong balance sheet gives management the financial flexibility to run a balanced capital allocation strategy going forward that mostly favors organic growth and also returns cash to shareholders. In terms of liquidity, the company can meet its near-term debt obligations given its strong cash balance. The company’s cash position as of year-end 2021 stood at $8.4 billion on its industrial balance sheet. One can also find comfort in Caterpillar’s ability to tap into available lines of credit to meet any short-term needs. Caterpillar has access to $10.5 billion in credit facilities for the consolidated business (including financial services), of which, $2.8 billion is available to the industrial business. Caterpillar’s focus on operational excellence in its industrial operations and improved cost base has put the company on better footing when it comes to free cash flow generation throughout the economic cycle. The company can generate $6 billion in free cash flow in midcycle year, supporting its ability to return nearly all of its free cash flow to shareholders through dividends and share repurchases. The captive finance arm holds considerably more debt than the industrial business, but this is reasonable, given its status as a lender to both customers and dealers. Total debt stood at $28 billion in 2021, along with $27 billion in finance receivables and $826 million in cash. As per view view, Caterpillar enjoys a strong financial position supported by a clean balance sheet and strong free cash flow prospects.

Bulls Say

  • Increased infrastructure spending in the U.S. and emerging markets will lead to more construction equipment purchases, substantially boosting Caterpillar’s sales growth.
  • Higher fixed-asset investment growth in China strengthens support for increased investment in mining capital expenditures, benefiting Caterpillar
  • A continued recovery from the temporary demand shock in oil prices will lead to increased oil and gas capital expenditures, leading to more engine, transmission, and pump sales for Caterpillar.

Company Description

Caterpillar is an iconic manufacturer of heavy equipment, power solutions, and locomotives. It is currently the world’s largest manufacturer of heavy equipment with over 13% market share in 2021. The company is divided into four reportable segments: construction industries, resource industries, energy and transportation, and Caterpillar Financial Services. Its products are available through a dealer network that covers the globe with about 2,700 branches maintained by 160 dealers. Caterpillar Financial Services provides retail financing for machinery and engines to its customers, in addition to wholesale financing for dealers, which increases the likelihood of Caterpillar product sales.

(Source: Morningstar)

DISCLAIMER for General Advice: (This document is for general advice only).

This document is provided by Laverne Securities Pty Ltd T/as Laverne Investing. Laverne Securities Pty Ltd, CAR 001269781 of Laverne Capital Pty Ltd AFSL No. 482937.

The material in this document may contain general advice or recommendations which, while believed to be accurate at the time of publication, are not appropriate for all persons or accounts. This document does not purport to contain all the information that a prospective investor may require.  The material contained in this document does not take into consideration an investor’s objectives, financial situation or needs. Before acting on the advice, investors should consider the appropriateness of the advice, having regard to the investor’s objectives, financial situation, and needs. The material contained in this document is for sales purposes. The material contained in this document is for information purposes only and is not an offer, solicitation or recommendation with respect to the subscription for, purchase or sale of securities or financial products and neither or anything in it shall form the basis of any contract or commitment. This document should not be regarded by recipients as a substitute for the exercise of their own judgment and recipients should seek independent advice.

The material in this document has been obtained from sources believed to be true but neither Laverne and Banyan Tree nor its associates make any recommendation or warranty concerning the accuracy or reliability or completeness of the information or the performance of the companies referred to in this document. Past performance is not indicative of future performance. Any opinions and or recommendations expressed in this material are subject to change without notice and, Laverne and Banyan Tree are not under any obligation to update or keep current the information contained herein. References made to third parties are based on information believed to be reliable but are not guaranteed as being accurate.

Laverne and Banyan Tree and its respective officers may have an interest in the securities or derivatives of any entities referred to in this material. Laverne and Banyan Tree do and seek to do business with companies that are the subject of its research reports. The analyst(s) hereby certify that all the views expressed in this report accurately reflect their personal views about the subject investment theme and/or company securities.

Although every attempt has been made to verify the accuracy of the information contained in the document, liability for any errors or omissions (except any statutory liability which cannot be excluded) is specifically excluded by Laverne and Banyan Tree, its associates, officers, directors, employees, and agents.  Except for any liability which cannot be excluded, Laverne and Banyan Tree, its directors, employees and agents accept no liability or responsibility for any loss or damage of any kind, direct or indirect, arising out of the use of all or any part of this material.  Recipients of this document agree in advance that Laverne and Banyan Tree are not liable to recipients in any matters whatsoever otherwise; recipients should disregard, destroy or delete this document. All information is correct at the time of publication. Laverne and Banyan Tree do not guarantee reliability and accuracy of the material contained in this document and are not liable for any unintentional errors in the document.

The securities of any company(ies) mentioned in this document may not be eligible for sale in all jurisdictions or to all categories of investors. This document is provided to the recipient only and is not to be distributed to third parties without the prior consent of Laverne and Banyan Tree.

Categories
Dividend Stocks

Operational Challenges Hinder International Paper’s Ability to Capitalize on Strong Box Demand

Business Strategy & Outlook

 International Paper manufactures packaging products and cellulose fibers. It accounts for roughly one third of the North American corrugated packaging market. Though it has operations in Brazil, Russia, India, and China, more than three fourths of its sales come from North America. A decade of consolidation in the corrugated packaging industry has allowed International Paper to raise prices and boost margins, but increased competitive intensity and rising input costs have weighed on profitability in recent years.

In International Paper’s largest segment, industrial packaging, the company manufactures containerboard. Roughly 80% of the company’s containerboard production is sent to International Paper’s box plants where it is converted into corrugated packaging. The remaining 20% is sold on the open market to local or regional box manufactures. This packaging is used in a variety of end markets, including food and beverage, e-commerce, paper products, and other goods. Corrugated boxes provide a strong yet lightweight packaging option that is cost-effective. This dynamic has made corrugated boxes a favorite in the packaging industry and is used in many different end markets. Roughly 85% of the sales in industrial packaging are in the United States. The cellulose fibers segment produces fluff, market, and specialty pulps. Fluff pulp is used to produce absorbent products such as baby diapers while market pulp is used to manufacture tissue and paper products. Fluff and specialty pulps account for about 80% of the cellulose segment. In 2021, International Paper spun off its printing paper segment, now known as Sylvamo. International Paper initially kept a 19.9% ownership stake in Sylvamo but has since sold roughly half its position in the company. IP’s management team has stated that they intend to monetize their remaining position in Sylvamo soon. International Paper also received a one-time dividend of $1.4 billion, which Sylvamo funded with debt. Following the completion of the spinoff, International Paper is primarily a containerboard business with some fluff pulp assets.

Financial Strengths

The international Paper has a sound capital structure, and its consistent free cash flow generation should easily support its debt-service requirements and future capital-allocation decisions. Following the spinoff of the firm’s paper business, International Paper reduced its debt by $2.5 billion to shore up up its financial position and maintain its investment-grade credit rating. International Paper now has a net debt/EBITDA of roughly 1.6, down from 4.0 in 2016. Historically, International Paper has made acquisitions in both the industrial packaging and cellulose fibers industry. The any future acquisitions would be small as both industries are highly consolidated, with International Paper having the largest share in both markets. International Paper has roughly $5 billion of outstanding debt with staggered maturities through 2048. International Paper has ample liquidity, with over $1 billion of cash on hand and no outstanding borrowings on a $1.5 billion credit facility. International Paper has a history of strong free cash flow generation, and the firm to maintain its sound capital structure.

Bulls Say

  • After a decade of adjusting its business model to improve profitability, International Paper will enjoy solid returns as it now operates primarily as a containerboard company.
  • International Paper, WestRock and Packaging Corp. of America will remain disciplined in taking economic downtime when needed in order to safeguard prices.
  • International Paper’s exposure to emerging markets will provide excellent opportunities for growth in the coming years.

Company Description

International Paper manufactures packaging products and cellulose fibers. It accounts for roughly one third of the North American corrugated packaging market. Though it has operations in Brazil, Russia, India, and China, more than three fourths of its sales come from North America. International Paper serves a variety of end markets, including industrial, consumer products, and manufacturing.

(Source: Morningstar)

DISCLAIMER for General Advice: (This document is for general advice only).

This document is provided by Laverne Securities Pty Ltd T/as Laverne Investing. Laverne Securities Pty Ltd, CAR 001269781 of Laverne Capital Pty Ltd AFSL No. 482937.

The material in this document may contain general advice or recommendations which, while believed to be accurate at the time of publication, are not appropriate for all persons or accounts. This document does not purport to contain all the information that a prospective investor may require.  The material contained in this document does not take into consideration an investor’s objectives, financial situation or needs. Before acting on the advice, investors should consider the appropriateness of the advice, having regard to the investor’s objectives, financial situation, and needs. The material contained in this document is for sales purposes. The material contained in this document is for information purposes only and is not an offer, solicitation or recommendation with respect to the subscription for, purchase or sale of securities or financial products and neither or anything in it shall form the basis of any contract or commitment. This document should not be regarded by recipients as a substitute for the exercise of their own judgment and recipients should seek independent advice.

The material in this document has been obtained from sources believed to be true but neither Laverne and Banyan Tree nor its associates make any recommendation or warranty concerning the accuracy or reliability or completeness of the information or the performance of the companies referred to in this document. Past performance is not indicative of future performance. Any opinions and or recommendations expressed in this material are subject to change without notice and, Laverne and Banyan Tree are not under any obligation to update or keep current the information contained herein. References made to third parties are based on information believed to be reliable but are not guaranteed as being accurate.

Laverne and Banyan Tree and its respective officers may have an interest in the securities or derivatives of any entities referred to in this material. Laverne and Banyan Tree do and seek to do business with companies that are the subject of its research reports. The analyst(s) hereby certify that all the views expressed in this report accurately reflect their personal views about the subject investment theme and/or company securities.

Although every attempt has been made to verify the accuracy of the information contained in the document, liability for any errors or omissions (except any statutory liability which cannot be excluded) is specifically excluded by Laverne and Banyan Tree, its associates, officers, directors, employees, and agents.  Except for any liability which cannot be excluded, Laverne and Banyan Tree, its directors, employees and agents accept no liability or responsibility for any loss or damage of any kind, direct or indirect, arising out of the use of all or any part of this material.  Recipients of this document agree in advance that Laverne and Banyan Tree are not liable to recipients in any matters whatsoever otherwise; recipients should disregard, destroy or delete this document. All information is correct at the time of publication. Laverne and Banyan Tree do not guarantee reliability and accuracy of the material contained in this document and are not liable for any unintentional errors in the document.

The securities of any company(ies) mentioned in this document may not be eligible for sale in all jurisdictions or to all categories of investors. This document is provided to the recipient only and is not to be distributed to third parties without the prior consent of Laverne and Banyan Tree.

Categories
Dividend Stocks

GQG Partners Initiation: Strong Momentum And Upside Not Priced In

Two young women talking together with a tablet in the living room. They sit spaced apart to prevent the virus.

Business Strategy & Outlook

GQG is a boutique manager of listed equities. As of April 2022, GQG manages USD 90 billion for institutional, wholesale and sub advised clients. GQG manages global, U.S., ex-U.S., and emerging market equities. The firm has a blended investment style: It is willing to pay up for quality growth companies, but also holds stocks trading at lower valuation multiples. GQG’s portfolios are concentrated and don’t resemble their benchmarks. Its strategies tend to outperform more during downturns than in bull markets. The firm is in the early innings of expanding out of its core U.S. market. GQG is growing its distribution in Australia, Canada, and the Middle East. It is particularly focused on exploiting the growth of Australia’s superannuation system. It also intends to grow its number of wholesale and subadvised mandates. More than 75% of FUM is U.S.-centred, and less-sticky institutional and subadvised money. 

Management prioritises organic growth over acquisitions. Rather than proliferating its offerings, GQG would sell new products only when its research efforts can be leveraged, with minimal incremental investment. For example, its concentrated global strategy is a subset of its global equity offering. The firm deliberately undercuts competitors on pricing and boasts below-average fees. Ongoing inflows and compounding of FUM is expected to drive earnings growth. A strong track record, expanding distribution and growing publicity beyond the U.S. are likely to support new business wins. There is ample capacity for the firm to onboard more clients as it mainly invests in large caps. Having bottom-quartile fees means GQG is well-positioned to withstand industry wide fee compression relative to other active managers. Moreover, there is still room for operating margins to expand as GQG’s expense needs—including remuneration—are not tied to revenue. However, investors should brace for periods of uneven performance given GQG’s portfolio and product concentration. The lack of product variety means GQG has limited levers to stem net outflows. GQG remains highly reliant on co-founder Rajiv Jain, so the group has much to lose if it cannot retain his services.

Financial Strengths

GQG’s strong financial health is underpinned by its conservative balance sheet with no debt and a healthy cash balance. Operations are funded by operating cash flows. Its 2021 initial public offering was a sell-down, with the proceeds raised mainly used to pay Rajiv Jain, Tim Carver, Pacific Current Group and internal employees. The firm has no intention (nor a need) to drawdown debt to fund its operating activities. Consistent earnings, strong cash flow conversion, and a strong balance sheet support GQG’s high dividend payout ratio target of between 85%-95% of distributable earnings (net income after tax plus tax benefit resulting from amortisation of the deferred tax asset). High dividend payouts are a key feature of the capital-light asset-management sector, delivering attractive shareholder returns while maintaining comfortable balance sheet settings. Notwithstanding the high payout ratio, GQG’s cash on balance sheet is projected to grow, enabling attractive dividends despite possible earnings volatility. 

Bulls Say

  • GQG’s enviable performance track record is supportive of further mandate wins. 
  • The firm is better placed than most active managers to withstand fee compression thanks to its highly competitive fee structure. 
  • There is further room for GQG to grow earnings. Penetration in certain strategy categories remain low, and it’s in the early innings of distributing outside the U.S. Its sheer scale of FUM means that earnings can grow from just compounding market returns.

Company Description

Established in 2016, GQG Partners Inc. is a global boutique asset management firm focused on active equity portfolios. The company offers investment advisory and portfolio management services. GQG Partners manages money for investors around the world. They include pension funds, sovereign funds, wealth management firms, and other financial institutions. Headquartered in Fort Lauderdale, Florida, GQG also has operations in New York, Seattle, London, Sydney, and other locations.

(Source: Morningstar)

DISCLAIMER for General Advice: (This document is for general advice only).

This document is provided by Laverne Securities Pty Ltd T/as Laverne Investing. Laverne Securities Pty Ltd, CAR 001269781 of Laverne Capital Pty Ltd AFSL No. 482937.

The material in this document may contain general advice or recommendations which, while believed to be accurate at the time of publication, are not appropriate for all persons or accounts. This document does not purport to contain all the information that a prospective investor may require.  The material contained in this document does not take into consideration an investor’s objectives, financial situation or needs. Before acting on the advice, investors should consider the appropriateness of the advice, having regard to the investor’s objectives, financial situation, and needs. The material contained in this document is for sales purposes. The material contained in this document is for information purposes only and is not an offer, solicitation or recommendation with respect to the subscription for, purchase or sale of securities or financial products and neither or anything in it shall form the basis of any contract or commitment. This document should not be regarded by recipients as a substitute for the exercise of their own judgment and recipients should seek independent advice.

The material in this document has been obtained from sources believed to be true but neither Laverne and Banyan Tree nor its associates make any recommendation or warranty concerning the accuracy or reliability or completeness of the information or the performance of the companies referred to in this document. Past performance is not indicative of future performance. Any opinions and or recommendations expressed in this material are subject to change without notice and, Laverne and Banyan Tree are not under any obligation to update or keep current the information contained herein. References made to third parties are based on information believed to be reliable but are not guaranteed as being accurate.

Laverne and Banyan Tree and its respective officers may have an interest in the securities or derivatives of any entities referred to in this material. Laverne and Banyan Tree do and seek to do business with companies that are the subject of its research reports. The analyst(s) hereby certify that all the views expressed in this report accurately reflect their personal views about the subject investment theme and/or company securities.

Although every attempt has been made to verify the accuracy of the information contained in the document, liability for any errors or omissions (except any statutory liability which cannot be excluded) is specifically excluded by Laverne and Banyan Tree, its associates, officers, directors, employees, and agents.  Except for any liability which cannot be excluded, Laverne and Banyan Tree, its directors, employees and agents accept no liability or responsibility for any loss or damage of any kind, direct or indirect, arising out of the use of all or any part of this material.  Recipients of this document agree in advance that Laverne and Banyan Tree are not liable to recipients in any matters whatsoever otherwise; recipients should disregard, destroy or delete this document. All information is correct at the time of publication. Laverne and Banyan Tree do not guarantee reliability and accuracy of the material contained in this document and are not liable for any unintentional errors in the document.

The securities of any company(ies) mentioned in this document may not be eligible for sale in all jurisdictions or to all categories of investors. This document is provided to the recipient only and is not to be distributed to third parties without the prior consent of Laverne and Banyan Tree.

Categories
Technology Stocks

Wide-Moat James Hardie’s Fiscal 2022 Largely as Expected; Shares Look Attractive

Business Strategy & Outlook

 The supportive of Hardie’s strategy. Hardie’s primary strategic objectives are to expand fibre cement’s share of the U.S. exterior siding market and to shift its sales mix to higher-margin products. The goals are mutually reinforcing and achievable. Hardie has been a key beneficiary of the secular decline of vinyl siding owing to the durability advantages of fibre cement. Hardie estimates vinyl’s share of the U.S. exterior siding market has declined from approximately 40% in 2008 to around 25% in fiscal 2021.This trend to persist with Hardie continuing to be a major beneficiary. The Hardie will be able to leverage its research and development capabilities to penetrate other siding categories such as brick, stone, and stucco. Hardie’s fibre cement product innovations can mimic the appearance of these product categories while being less labor-intensive to install than brick and stone and resolving the performance issues of stucco. Hardie is tailoring its product innovations towards higher margin product categories by focusing on the aesthetic performance of the product, generating an emotional attachment from the consumer, and stimulating less price elastic demand. This strategy is supplemented by Hardie’s marketing campaign which aims to communicate Hardie’s value proposition directly to homeowners. Overall, the Hardie will be successful in continuing to expand fibre cement’s share of the exterior siding market while simultaneously shifting its sales mix towards higher margin products.

The Hardie’s intention to further integrate operations with customers. Customer integration provides the facilitation of knowledge between Hardie and its customers, unlocking working capital benefits and providing opportunities for strategic initiatives. The Hardie’s entrenched customer relationships as a key aspect of the business’ wide economic moat.

Financial Strengths

Hardie declared a final dividend of USD 30 cents per share, taking its fiscal 2022 dividends to USD 70 cents per share. Dividends will be unfranked for Australian taxation purposes. An annual payout ratio of 60% of underlying earnings, the midpoint of Hardie’s 50%-70% targeted payout range. 

Hardie runs a conservative balance sheet with leverage— defined as net debt/adjusted EBITDA (excluding the impact of asbestos transactions)—typically within a targeted range of 1-2. Net debt/adjusted EBITDA stood at 0.8 at the end of fiscal 2022. Hardie’s asbestos-related liability—the AICF trust—has a gross carrying value at fiscal 2022 year-end of USD 1.1 billion and remains an overhang. However, payments to fund the liability are capped at 35% of operating cash flow after adjusting for asbestos liability-related payments. While this reduces cash flows available to shareholders over the medium term, the liability shouldn’t constrain the business’ ability to reinvest within itself. The liability being extinguished within the next decade, likely by fiscal 2027.

Bulls Say

  • James Hardie is poised to benefit from the secular growth of fibre cement siding at the expense of vinyl, brick, stone, and stucco.
  • James Hardie’s strategy of shifting its sales mix to higher-margin products will expand its EBIT margins and enhance return on invested capital.
  • James Hardie’s wide economic moat should protect its ability to earn above its cost of capital over the economic cycle.

Company Description

James Hardie is a producer of fibre cement construction materials. Hardie predominantly serves the residential construction industry with its flagship fibre cement siding product range. The group’s key segment is North America, where it derives around 70% of group earnings from the sale of fibre cement exterior siding and 10% from the sale of fibre cement interior boards. In 2021, the group acquired Fermacell, an exterior and interior products business headquartered in Germany and with operations throughout Europe

(Source: Morningstar)

DISCLAIMER for General Advice: (This document is for general advice only).

This document is provided by Laverne Securities Pty Ltd T/as Laverne Investing. Laverne Securities Pty Ltd, CAR 001269781 of Laverne Capital Pty Ltd AFSL No. 482937.

The material in this document may contain general advice or recommendations which, while believed to be accurate at the time of publication, are not appropriate for all persons or accounts. This document does not purport to contain all the information that a prospective investor may require.  The material contained in this document does not take into consideration an investor’s objectives, financial situation or needs. Before acting on the advice, investors should consider the appropriateness of the advice, having regard to the investor’s objectives, financial situation, and needs. The material contained in this document is for sales purposes. The material contained in this document is for information purposes only and is not an offer, solicitation or recommendation with respect to the subscription for, purchase or sale of securities or financial products and neither or anything in it shall form the basis of any contract or commitment. This document should not be regarded by recipients as a substitute for the exercise of their own judgment and recipients should seek independent advice.

The material in this document has been obtained from sources believed to be true but neither Laverne and Banyan Tree nor its associates make any recommendation or warranty concerning the accuracy or reliability or completeness of the information or the performance of the companies referred to in this document. Past performance is not indicative of future performance. Any opinions and or recommendations expressed in this material are subject to change without notice and, Laverne and Banyan Tree are not under any obligation to update or keep current the information contained herein. References made to third parties are based on information believed to be reliable but are not guaranteed as being accurate.

Laverne and Banyan Tree and its respective officers may have an interest in the securities or derivatives of any entities referred to in this material. Laverne and Banyan Tree do and seek to do business with companies that are the subject of its research reports. The analyst(s) hereby certify that all the views expressed in this report accurately reflect their personal views about the subject investment theme and/or company securities.

Although every attempt has been made to verify the accuracy of the information contained in the document, liability for any errors or omissions (except any statutory liability which cannot be excluded) is specifically excluded by Laverne and Banyan Tree, its associates, officers, directors, employees, and agents.  Except for any liability which cannot be excluded, Laverne and Banyan Tree, its directors, employees and agents accept no liability or responsibility for any loss or damage of any kind, direct or indirect, arising out of the use of all or any part of this material.  Recipients of this document agree in advance that Laverne and Banyan Tree are not liable to recipients in any matters whatsoever otherwise; recipients should disregard, destroy or delete this document. All information is correct at the time of publication. Laverne and Banyan Tree do not guarantee reliability and accuracy of the material contained in this document and are not liable for any unintentional errors in the document.

The securities of any company(ies) mentioned in this document may not be eligible for sale in all jurisdictions or to all categories of investors. This document is provided to the recipient only and is not to be distributed to third parties without the prior consent of Laverne and Banyan Tree.

Categories
Technology Stocks

JD is seeing signs of Bottoming Out, Downgrading 2022 Estimates

Business Strategy & Outlook:  

JD.com has emerged as a leading disruptive force in China’s retail industry by offering authentic products online at competitive prices with speedy and high-quality delivery service. JD’s mobile shopping market share has increased from 21% in 2016 to 27% in 2020. JD adopted an asset-heavy model with self-owned inventory and self-built logistics, while Alibaba has more of an asset-light model. JD is a long-term margin expansion story driven by increasing scale from JD direct sales and marketplace, partially offset by the push into JD logistics in the medium term. JD is the largest retailer in China by revenue. Among listed Chinese peers, JD’s net product revenue in 2020 was two to three times higher than for Suning, the second-largest listed retailer. JD’s increasing scale in each category will allow it to garner bargaining power toward the suppliers and volume-based rebates. Since 2016, JD no longer fully reinvests its gains from improving scale and is committed to delivering annual margin expansion in the long run. The increase in mix from higher-margin third-party platform business and efficiency of scale will also help lift margins. In the medium term, the investment into community group purchase and JD logistics, and the higher mix of lower-margin supermarket category will hold back some of the margin gains. Starting in April 2017, the logistics business became an independent business unit that opens its services to third parties. Management is squarely focused on gaining market share instead of profitability at this point, and to do so, it has invested heavily in supply chain management, integrated warehouse, and delivery services to penetrate into less developed areas. As the logistics business gains scale and reaches higher capacity utilization, the gross profit margin shall improvement. Management believes it is not time to turn profitable in the supermarket category in order to be a category leader in China.

Financial Strengths: 

JD.com had a net cash position of CNY 135 billion at the end of 2020. Its free cash flow to the firm has continued to generate positive FCFF at CNY 8.1 billion in 2020. JD has not paid dividends. JD.com has invested heavily in fulfilment infrastructure and technology in recent years, leading to concerns about its free cash flow profile and margin improvement story. The management will put more emphasis on growing revenue per user, expansion into lower-tier cities and the businesses’ profitability. Therefore, JD will not invest in new areas as aggressively as before, so JD will be able to maintain positive non-GAAP net margin versus being unprofitable before. its financial strength will improve in future. Most of the initial investments in the third-party logistics business have been carried out, and utilization of the warehouses has picked up. Its technology team is already in place without the need to add substantial headcounts. JD will also be cautious in its investment in the group-buying business and new retail, given a profitable business model has not been established in the market. JD has tried to improve its asset-heavy model by transferring a portfolio of warehouses to establish a CNY 10.9 billion logistics property core fund in partnership with the sovereign wealth fund of Singapore, GIC. JD will own 20% of the fund, lease back the logistics facilities, and receive management fees for managing the facilities. The deal will be completed in phases with the majority of them completed in 2019.

Bulls Say: 

  • JD.com’s nationwide distribution network and fulfilment capacity will be extremely difficult for competitors to replicate. 
  • As its first-party business gains scale, cost advantage will lead to lower sourcing costs and higher margin.
  • JD is now the largest supermarket in China, the high- frequency FMCG categories have attracted new customers from less developed areas and can drive purchase of other categories.

Company Description: 

JD.com is China’s second-largest e-commerce company after Alibaba in terms of gross merchandise volume, offering a wide selection of authentic products at competitive prices, with speedy and reliable delivery. The company has built its own nationwide fulfilment infrastructure and last-mile delivery network, staffed by its own employees, which supports both its online direct sales, its online marketplace and omnichannel businesses.

(Source: Morningstar)

DISCLAIMER for General Advice: (This document is for general advice only).

This document is provided by Laverne Securities Pty Ltd T/as Laverne Investing. Laverne Securities Pty Ltd, CAR 001269781 of Laverne Capital Pty Ltd AFSL No. 482937.

The material in this document may contain general advice or recommendations which, while believed to be accurate at the time of publication, are not appropriate for all persons or accounts. This document does not purport to contain all the information that a prospective investor may require.  The material contained in this document does not take into consideration an investor’s objectives, financial situation or needs. Before acting on the advice, investors should consider the appropriateness of the advice, having regard to the investor’s objectives, financial situation, and needs. The material contained in this document is for sales purposes. The material contained in this document is for information purposes only and is not an offer, solicitation or recommendation with respect to the subscription for, purchase or sale of securities or financial products and neither or anything in it shall form the basis of any contract or commitment. This document should not be regarded by recipients as a substitute for the exercise of their own judgment and recipients should seek independent advice.

The material in this document has been obtained from sources believed to be true but neither Laverne and Banyan Tree nor its associates make any recommendation or warranty concerning the accuracy or reliability or completeness of the information or the performance of the companies referred to in this document. Past performance is not indicative of future performance. Any opinions and or recommendations expressed in this material are subject to change without notice and, Laverne and Banyan Tree are not under any obligation to update or keep current the information contained herein. References made to third parties are based on information believed to be reliable but are not guaranteed as being accurate.

Laverne and Banyan Tree and its respective officers may have an interest in the securities or derivatives of any entities referred to in this material. Laverne and Banyan Tree do and seek to do business with companies that are the subject of its research reports. The analyst(s) hereby certify that all the views expressed in this report accurately reflect their personal views about the subject investment theme and/or company securities.

Although every attempt has been made to verify the accuracy of the information contained in the document, liability for any errors or omissions (except any statutory liability which cannot be excluded) is specifically excluded by Laverne and Banyan Tree, its associates, officers, directors, employees, and agents.  Except for any liability which cannot be excluded, Laverne and Banyan Tree, its directors, employees and agents accept no liability or responsibility for any loss or damage of any kind, direct or indirect, arising out of the use of all or any part of this material.  Recipients of this document agree in advance that Laverne and Banyan Tree are not liable to recipients in any matters whatsoever otherwise; recipients should disregard, destroy or delete this document. All information is correct at the time of publication. Laverne and Banyan Tree do not guarantee reliability and accuracy of the material contained in this document and are not liable for any unintentional errors in the document.

The securities of any company(ies) mentioned in this document may not be eligible for sale in all jurisdictions or to all categories of investors. This document is provided to the recipient only and is not to be distributed to third parties without the prior consent of Laverne and Banyan Tree.

Categories
Commodities Trading Ideas & Charts

Sempra Could See Additional LNG Opportunities but Focus Should Remain on Utilities

Business Strategy & Outlook

Sempra Energy’s investment opportunities at its regulated utilities in California and Texas will remain the primary growth driver. California’s regulatory environment has remained constructive for Sempra, as its emphasis on distribution-related safety and reliability infrastructure upgrades aligns well with the state’s regulatory priorities. Sempra has received constructive regulatory treatment in the state. The company’s most recent outcome positions the California utilities to grow rate base 9% annually at SDG&E and 12% at SoCalGas, supported by a combined $21 billion of capital investment during the next five years. The state’s regulatory environment will be put to a test during a busy regulatory calendar in the state. Both of Sempra’s subsidiaries in the state filed cost of capital proceedings for 2023-25. Additionally, the company will soon file a general rate case proposal with regulators to determine revenue in 2024-27. Overall, the constructive outcomes.

Sempra’s Texas subsidiaries’ transmission assets should continue to benefit from Texas’ aggressive wind generation build-out. Management continues to identify capital investment opportunities in the state. The expected $17.0 billion capital investment for 2022-26 to address economic development, customer growth, and grid hardening and expansion. Sempra’s natural gas infrastructure businesses should be able to capitalize on the increasing demand for natural gas. Management is moving forward on developing its LNG portfolio, including its ECA LNG export facility. Sempra management limits the risk with LNG development by entering into long-term contracts with creditworthy counterparties, many of which also become equity owners. Management has effectively recycled capital to fund its growing capital plan. Sempra Energy recently sold a 20% noncontrolling interest in Sempra Infrastructure Partners to KKR, which houses LNG, natural gas infrastructure, and Mexican renewable energy and transmission assets. In December, Sempra announced that it would sell an additional 10% ownership to Abu Dhabi Investment Authority. Both transactions were at what one can consider very attractive valuations.

Financial Strengths

The Sempra to maintain a balance sheet with about mid-50% debt through 2026, in line with most regulated utilities. Small equity issuances will help fund the company’s investment plans. With the Cameron LNG export facility completed, Sempra is also considering pursuing incremental large-scale development of other export facilities in its infrastructure portfolio. Any of Sempra’s incremental capital expenditures for the facility would likely be mostly project-financed with equity contributions from LNG off takers. The debt/EBITDA to be below 5.0 times through 2026. With robust capital expenditure plans and ongoing development of its unregulated business, the company to continue borrowing at both the utility and parent levels in the next few years. EBITDA/interest coverage should remain solid, averaging above 5 times through 2026 in the forecast. Sempra’s liquidity remains strong. Sempra’s liquidity position and cash flow generation should give investors’ confidence that it can maintain and grow its dividend.

Bulls Say

  • Opportunities for rate base growth at Sempra’s utilities are above average, and California and Texas regulation generally allows timely recovery of capital expenditures and a dynamic cost of capital.
  • As an early and large investor in the Mexican energy sector, Sempra could see an outsize share of new development projects under market deregulation.
  • Sempra’s LNG terminals and pipeline give investors exposure to a growing market for natural gas in the U.S. and Mexico.

Company Description

Sempra Energy serves one of the largest utility customer bases in the United States. It distributes natural gas and electricity in Southern California and owns 80% of Oncor, a transmission and distribution business in Texas. SoCalGas and San Diego Gas & Electric distribute gas to more than 20

million customers, while Oncor serves more than 10 million Texas customers. The firm’s other affiliates own and operate liquefied natural gas facilities in North America and infrastructure in 

Mexico.

(Source: Morningstar)

DISCLAIMER for General Advice: (This document is for general advice only).

This document is provided by Laverne Securities Pty Ltd T/as Laverne Investing. Laverne Securities Pty Ltd, CAR 001269781 of Laverne Capital Pty Ltd AFSL No. 482937.

The material in this document may contain general advice or recommendations which, while believed to be accurate at the time of publication, are not appropriate for all persons or accounts. This document does not purport to contain all the information that a prospective investor may require.  The material contained in this document does not take into consideration an investor’s objectives, financial situation or needs. Before acting on the advice, investors should consider the appropriateness of the advice, having regard to the investor’s objectives, financial situation, and needs. The material contained in this document is for sales purposes. The material contained in this document is for information purposes only and is not an offer, solicitation or recommendation with respect to the subscription for, purchase or sale of securities or financial products and neither or anything in it shall form the basis of any contract or commitment. This document should not be regarded by recipients as a substitute for the exercise of their own judgment and recipients should seek independent advice.

The material in this document has been obtained from sources believed to be true but neither Laverne and Banyan Tree nor its associates make any recommendation or warranty concerning the accuracy or reliability or completeness of the information or the performance of the companies referred to in this document. Past performance is not indicative of future performance. Any opinions and or recommendations expressed in this material are subject to change without notice and, Laverne and Banyan Tree are not under any obligation to update or keep current the information contained herein. References made to third parties are based on information believed to be reliable but are not guaranteed as being accurate.

Laverne and Banyan Tree and its respective officers may have an interest in the securities or derivatives of any entities referred to in this material. Laverne and Banyan Tree do and seek to do business with companies that are the subject of its research reports. The analyst(s) hereby certify that all the views expressed in this report accurately reflect their personal views about the subject investment theme and/or company securities.

Although every attempt has been made to verify the accuracy of the information contained in the document, liability for any errors or omissions (except any statutory liability which cannot be excluded) is specifically excluded by Laverne and Banyan Tree, its associates, officers, directors, employees, and agents.  Except for any liability which cannot be excluded, Laverne and Banyan Tree, its directors, employees and agents accept no liability or responsibility for any loss or damage of any kind, direct or indirect, arising out of the use of all or any part of this material.  Recipients of this document agree in advance that Laverne and Banyan Tree are not liable to recipients in any matters whatsoever otherwise; recipients should disregard, destroy or delete this document. All information is correct at the time of publication. Laverne and Banyan Tree do not guarantee reliability and accuracy of the material contained in this document and are not liable for any unintentional errors in the document.

The securities of any company(ies) mentioned in this document may not be eligible for sale in all jurisdictions or to all categories of investors. This document is provided to the recipient only and is not to be distributed to third parties without the prior consent of Laverne and Banyan Tree.

Categories
Technology Stocks

Ritchie Bros. Puts a Spotlight on its Services Business at its Investor Day

Digital tablet display the stock market data

Business Strategy & Outlook

Ritchie Bros. provides auction and marketplace services for used heavy equipment. The company’s strong auction liquidity attracts both buyers and sellers to its network. The Ritchie Bros. will continue to be one of the top players in the asset disposition market. The network effects present in its business have consistently delivered higher average selling prices for consignors (or sellers) and provided buyers a wide range of equipment to choose from. For both parties, Ritchie Bros. drives significant amount of value, which has allowed it to monetize its network effects and develop a strong competitive positioning.

Ritchie Bros.’ strategy going forward is to move its business from being primarily transaction based to more solutions based. It has developed digital solutions that range from inventory management solutions for buyers to market intelligence tools for sellers. The company is also pushing to provide more services to customers, such as equipment inspections, storage, and advertising, in addition to asset valuation services. While these services have the potential to drive higher profitability, the it will be challenging to drive adoption rates higher in the near term. Customers will need to be convinced of the value that add-on services can bring to their buying or selling experience.  The company has exposure to attractive tailwinds in the near term. Construction equipment makes up more than half of the equipment sold through Ritchie Bros., with the balance in transportation and agriculture equipment. The near term looks bright for each of these markets, meaning Ritchie Bros. will likely see increased activity on its marketplace. In economic upturns, equipment owners often opt to sell their older equipment to buy newer ones. Ritchie Bros. also benefits when markets are pressured, and equipment owners look to increase their liquidity levels through asset disposals (such as bankruptcies). The used equipment supply will continue to loosen in the near term and lead to greater auction liquidity for Ritchie Bros.

Financial Strengths

Ritchie Bros.’ total debt at the end of 2021 stood at $1.7 billion, which equates to a net debt/adjusted EBITDA ratio of 4. The company issued new debt (over $900 million) in 2021 to fund its acquisition of Euro Auctions, however, the company intends to issue redemption notices on the new debt, given its decision to discontinue the deal. Historically, the company’s total debt has ranged between $100 million-$250 million. In 2016, Ritchie Bros.’ total debt rose to $619 million (up from $110 million in 2015) after it issued notes with a principal of $500 million (due in 2025) to partially fund its acquisition of Iron Planet. The company can generate $400 million in free cash flow in the midcycle year, supporting its ability to bring debt levels down.

Ritchie Bros. also provides financial services to its customers by matching them with lenders (it receives a fee for acting as broker). Management has expressed interest in expanding its financial services to get access to assets that will likely be sold through bankruptcies. The Ritchie Bros. will work to leverage its partnership with Gordon Brothers, an investment firm focused on working with businesses dealing with insolvency issues. By using its excess capital, Ritchie Bros. can potentially bring additional assets to its marketplace to be sold off, but this is more of a long-term opportunity rather than an immediate value driver. In terms of liquidity, the company can meet its near-term debt obligations given its strong cash balance. The company’s cash position as of 2021 stood at $326 million on its balance sheet. One can also find comfort in its ability to tap into available lines of credit to meet any short-term needs. The company has access to $525 million in credit facilities. It maintains a strong financial position with a clean balance sheet.

Bulls Say

  • Increasing construction activity could lead equipment owners to buy new machines and sell their used equipment through Ritchie Bros.’ auctions, substantially boosting its revenue growth.
  • Equipment owners may feel more comfortable putting their machines up for sale as the economic environment improves, strengthening Ritchie Bros.’ auction liquidity.
  • Ritchie Bros.’ success operating in a fully online environment during the pandemic might convince more buyers to leave other machinery-focused websites for its auctions, which could boost the company’s profitability.

Company Description

Ritchie Bros. operates the world’s leading marketplace for heavy equipment. The company started as a live auctioneer of industrial equipment, since then it has greatly expanded its operations to include the sale of construction, agricultural, oilfield, and transportation equipment. Ritchie Bros. operates over 40 live auction sites in more than 12 countries, along with online marketplaces, including iron Planet, Marketplace-E, and GovPlanet. Its agricultural auctions are frequently much smaller venues and can include liquidations of single farms. The company holds over 300 auctions yearly and sells over $5 billion worth of equipment.

(Source: Morningstar)

DISCLAIMER for General Advice: (This document is for general advice only).

This document is provided by Laverne Securities Pty Ltd T/as Laverne Investing. Laverne Securities Pty Ltd, CAR 001269781 of Laverne Capital Pty Ltd AFSL No. 482937.

The material in this document may contain general advice or recommendations which, while believed to be accurate at the time of publication, are not appropriate for all persons or accounts. This document does not purport to contain all the information that a prospective investor may require.  The material contained in this document does not take into consideration an investor’s objectives, financial situation or needs. Before acting on the advice, investors should consider the appropriateness of the advice, having regard to the investor’s objectives, financial situation, and needs. The material contained in this document is for sales purposes. The material contained in this document is for information purposes only and is not an offer, solicitation or recommendation with respect to the subscription for, purchase or sale of securities or financial products and neither or anything in it shall form the basis of any contract or commitment. This document should not be regarded by recipients as a substitute for the exercise of their own judgment and recipients should seek independent advice.

The material in this document has been obtained from sources believed to be true but neither Laverne and Banyan Tree nor its associates make any recommendation or warranty concerning the accuracy or reliability or completeness of the information or the performance of the companies referred to in this document. Past performance is not indicative of future performance. Any opinions and or recommendations expressed in this material are subject to change without notice and, Laverne and Banyan Tree are not under any obligation to update or keep current the information contained herein. References made to third parties are based on information believed to be reliable but are not guaranteed as being accurate.

Laverne and Banyan Tree and its respective officers may have an interest in the securities or derivatives of any entities referred to in this material. Laverne and Banyan Tree do and seek to do business with companies that are the subject of its research reports. The analyst(s) hereby certify that all the views expressed in this report accurately reflect their personal views about the subject investment theme and/or company securities.

Although every attempt has been made to verify the accuracy of the information contained in the document, liability for any errors or omissions (except any statutory liability which cannot be excluded) is specifically excluded by Laverne and Banyan Tree, its associates, officers, directors, employees, and agents.  Except for any liability which cannot be excluded, Laverne and Banyan Tree, its directors, employees and agents accept no liability or responsibility for any loss or damage of any kind, direct or indirect, arising out of the use of all or any part of this material.  Recipients of this document agree in advance that Laverne and Banyan Tree are not liable to recipients in any matters whatsoever otherwise; recipients should disregard, destroy or delete this document. All information is correct at the time of publication. Laverne and Banyan Tree do not guarantee reliability and accuracy of the material contained in this document and are not liable for any unintentional errors in the document.

The securities of any company(ies) mentioned in this document may not be eligible for sale in all jurisdictions or to all categories of investors. This document is provided to the recipient only and is not to be distributed to third parties without the prior consent of Laverne and Banyan Tree.

Categories
Shares Small Cap

Waiting to Hear Seven’s Voice on Capital Management

The Japan Finance and market, Data Chart.

Business Strategy & Outlook: 

Seven, which generates the majority of its earnings through Seven Network’s free-to-air TV and broadcast video on demand units, offers exposure to the AUD 3.8 billion total Australian television advertising market. It is a media segment that has remained largely flat during the past 10 years, after consistently enjoying growth of about 6% in the preceding decade. The slowing growth has been caused by proliferating digital media alternatives, rapidly changing entertainment consumption habits, and increasing high-speed broadband adoption. Indeed, the structural headwinds have been such that the free-to-air television industry’s share of the Australian total advertising pie has slumped from more than 35% in the mid-2000s to just over 20% now, as advertisers follow eyeballs to digital media platforms. 

Within this mature industry, Seven Network commands the number-one or two position, with a 38%-40% rating and revenue share of the commercial metropolitan free-to-air television market. Its library of extensive sports and general entertainment programming has aided in the rise of these share metrics in recent years. Seven Network can maintain revenue shares at the 38.0% level on a long-term, midcycle basis. The key investment consideration comes down to Seven Network’s EBIT margin outlook. This is important in the face of increasing competition for viewers (from proliferating new digital entertainment options) and for content (from digital upstarts and incumbent television broadcasters). The group’s exposure to the even more structurally challenged print media industry is another key issue facing investors in Seven West Media. Earnings from the newspaper division have slumped from almost AUD 140 million in fiscal 2011 to AUD 28 million in fiscal 2021. However, combined profits from the print media business now account for less than 10% of the group’s total.

Financial Strengths:

The strong progress in balance sheet repair in recent years has vaporised the key concern regarding the group’s financial position. This is reflected in company’s net debt/EBITDA forecast of 0.8 by the end of fiscal 2022.

Bulls Say:  

  • Seven West Media commands a strong position in the Australian free-to-air television industry, with leading ratings and revenue shares.
  • The unique antisiphoning regime in Australia ensures that Seven Network will continue to have a stronghold on marquee live sports programming, such as the Australian Football League, cricket, and other sports events of national importance. 
  • Seven Network creates and produces about 70% of its television programming (excluding sports), far more than its peers, allowing the company to capture much of the content value chain in proliferating media channels.

Company Description: 

Seven West Media operates Seven Network, a free-to-air television network spread across five capital cities, as well as in regional Queensland. It also owns most of the newspapers circulating in Western Australia (including the monopoly Perth title called West Australian Newspapers), as well as the country’s second-largest magazine publishing group (Pacific Magazines). In the Australian online space, it operates broadcast on demand, or BVOD, service called 7plus.

(Source: Morningstar)

DISCLAIMER for General Advice: (This document is for general advice only).

This document is provided by Laverne Securities Pty Ltd T/as Laverne Investing. Laverne Securities Pty Ltd, CAR 001269781 of Laverne Capital Pty Ltd AFSL No. 482937.

The material in this document may contain general advice or recommendations which, while believed to be accurate at the time of publication, are not appropriate for all persons or accounts. This document does not purport to contain all the information that a prospective investor may require.  The material contained in this document does not take into consideration an investor’s objectives, financial situation or needs. Before acting on the advice, investors should consider the appropriateness of the advice, having regard to the investor’s objectives, financial situation, and needs. The material contained in this document is for sales purposes. The material contained in this document is for information purposes only and is not an offer, solicitation or recommendation with respect to the subscription for, purchase or sale of securities or financial products and neither or anything in it shall form the basis of any contract or commitment. This document should not be regarded by recipients as a substitute for the exercise of their own judgment and recipients should seek independent advice.

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